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Bear Stearns Profit Plunges 61% on Subprime Woes

Bear Stearns, rocked by the collapse of two hedge funds in the subprime mortgage crisis, said today that its third-quarter profit plunged 61 percent, hitting the lowest level in five years and topping off a painful summer for the Wall Street brokerage firm.

Bear’s bearish news stood in sharp contrast to a superlative performance by Goldman Sachs, which posted a 79 percent rise in third-quarter profit, led by strong results in its investment banking, currency, and commodities divisions.

It was one of Goldman’s most profitable quarters ever, and the starkly different earnings reports left some analysts impressed by the firm’s ability to outmaneuver the credit market turmoil that snared Bear.

“Let me just say this: Goldman’s conference call was 40 minutes; Bear’s was well over an hour,” said Meredith A. Whitney, an analyst with CIBC World Markets.

“The reason why Goldman has outperformed, and is going to continue to outperform, is it happens to have dominant market share in the areas of business where you want to be — emerging markets, global mergers and acquisitions and commodities,” said Ms. Whitney, who has recommended buying the firm’s stock. “It not only had that dominance; it outperformed in all those areas.”

Meanwhile, Bear’s profits were brought down by diminished fixed-income revenue coupled with a $200 million loss from its June hedge fund failures. Bear posted net income for the quarter of $171.3 million, or $1.16 a share, down from $438 million, or $3.02 a share, in the period a year earlier.

Net revenue for the firm, or total revenue minus interest costs, fell 37 percent to $1.33 billion, while net revenue at the fixed-income division dropped 88 percent, to $118 million from $945 million in the third quarter of 2006. Return on equity stood at 5.3 percent, compared with 16 percent a year earlier.

Some analysts are predicting layoffs and restructuring for Bear in the months ahead.

Bear Stearns’s chief executive, James E. Cayne, who ousted one of his top lieutenants last month in the wake of the summer’s problems, acknowledged in a statement that the firm’s third quarter “was characterized by extremely difficult securitization markets and high volatility levels across asset classes.”

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But pointing to increased revenue in the firm’s global equities and investment banking divisions, Mr. Cayne added, “I am confident in the underlying strength of our business and proud of the effort and determination displayed by our employees during these challenging times.”

Bear Stearns was the hardest hit of the major brokerage firms after this summer’s subprime crisis, which forced Morgan Stanley and Lehman Brothers, which reported third-quarter results earlier this week, to write down hundreds of millions of dollars in loans.

“Over all, I think that the investment banks numbers are at least better than people feared,” said James W. Paulsen, the chief investment officer of Wells Capital Management. “In aggregate, when you look at all of them, it leaves sort of a good feeling that even though they take a huge hit like that, they still by and large on average are standing.”

Goldman’s net income was $2.85 billion, or $6.13 a share, up from $1.59 billion, or $3.26 a share, in the period a year earlier, beating analyst’s expectations. Its return on equity increased to 36.6 percent from 31.6 percent.

“Given the difficult environment of the third quarter, many of our businesses were challenged,” Goldman’s chief executive, Lloyd C. Blankfein, said in a statement. “But over all, the quality of our franchise produced strong results as clients continue to look to us for advice and execution.”

Shares of Bear Stearns were holding up in trading, posting a 1.8 percent gain shortly before 1 p.m., while Goldman’s stock was up 0.8 percent.